Ooyala’s management has bought back the business from Telstra. The transaction was announced in a press release by Ooyala. The press release is light on details, providing no financial disclosures or transaction details. Ooyala’s CEO, Jonathan Huberman, does makes a reference in the press release to a “partnership with private equity investors,” though no investors are named.
The corporate journey of Ooyala is worth recapping. Ooyala was founded in 2007 and raised around $122 million before its August 2014 acquisition by Telstra. Teltra purchased Ooyala at a valuation of $360 million or around 5.5x the expected revenue of Ooyala for 2014. To put the valuation in context, Brightcove was approximately twice as large as Ooyala on a revenue basis and was at the time trading on the NASDAQ at an equity value of $200 million. Meaning, the valuation was high at the time of the purchase when compared to relevant, public data points.
There was great optimism from both Ooyala and Telstra expressed at the time of the acquisition.
“Telstra’s investment and controlling stake in Ooyala would help build it into a world leading personalised video platform company” stated then Telstra CEO David Thodey in the press release announcing the transaction.
Also, as part of announcing the transaction, Ooyala’s then CEO Jay Fulcher posted an open letter on the Company’s blog. “Our opportunity is enormous” wrote Fulcher and, “The market for the technologies and services we provide is will be [sic] worth tens of billions in the next few years.”
It was at the time – and still remains – a great example of how views on market size and expectations on market growth shape an investment thesis. Contrast those statements against the following link to the joint press release by Devoncroft and the IABM (joint venture entity IABM DC, www.iabmdc.com) on the 2015 IABM DC Global Market Valuation Report (GMVR), which is a collaborative initiative with the supplier community to publish a reference on market sizing and growth for the sector. The value of all technology spend on products and services in global media technology sector was estimated at $48 billion in 2014.
You would have needed a fundamentally different perspective in order to value Ooyala at 5.5x forward-looking sales. I don’t want that sentence to serve as a criticism, but rather as an observation. Markets are made through disagreement, and Telstra could have been right about the growth prospects.
Telstra certainly backed up its optimism with further investment. In October 2014 Telstra purchased advertising technology company Videoplaza for AUD $79 million (~$69 million USD). According to regulatory filings and Telstra financial disclosures Videoplaza had approximately AUD $10 million (~$8.5 million USD) of annual revenue and had losses in excess of revenue (note: not expenses, losses). Telstra continued adding to Ooyala with the AUD $77 million (~$58 million USD) acquisition of workflow orchestration provider Nativ in June 2015. Accordingly to regulatory filings and Telstra financial disclosures Nativ was a profitable business with annual revenue levels of around USD $6.5 million. The revenue multiples ascribed to both Videoplaza (~8.0x) and Nativ (~9.0x) are noteworthy.
Taken together those transactions (and associated currency movements) led to a goodwill balance of AUD $492 million for Telstra (more on this below).
There were some public data points suggesting the strategy was working. A July 30, 2015 article from The Australian quoted Jay Fulcher on exceeding the forecasted $65 million revenue indicated in the year-earlier acquisition press release. “Our intent is take the company [Ooyala] public. Over time this will become a multi-billion market-cap business” said Fulcher in the same article. The article also notes an employee level of almost 700, compared to the year-earlier figure of 330.
Circumstances appeared to change quickly. Telstra’s first financial disclosure in its 2015 annual report (year ending June 30, 2015) indicated an audited financial accounting profile of Ooyala at around USD $50 million annual sales and a loss before income tax of over USD $65 million. (I have converted these figures to USD at the historical exchange rate.) That doesn’t count the losses contributed by Videoplaza.
In November 2015, Ooyala announced Jay Fulcher was stepping down from the CEO position and would be replaced by Ramesh Srinivasan. Mr. Srinivasan remained as CEO until April 2017 and was then replaced by current CEO Jonathan Huberman. We shouldn’t lose sight of Jay Fulcher and Ooyala’s founders managing to generate a 4.4x cash-on-cash return for original investors.
When Telstra reported fiscal year results for 2016 in August of that year, the Company recorded an AUD $246 million impairment against the combined businesses of Ooyala, Videoplaza, and Nativ. The stated reason for the impairment was “due to changing dynamics in the intelligent video market and business performance.” Additional context on those changing dynamics was provided by Telstra’s CEO Andy Penn in an interview with the Financial Review in August 2016. I provide a quote from this article below.
While we don’t have the original projections used by Telstra to arrive at the 5.5x forward-looking revenue valuation of Ooyala in late 2014, we do have the assumptions disclosed to revisit the valuation. In its discussion of impairment, Telstra highlights its chosen discount rate of 24% (which was revised from 11.1% used in 2015). Using Telstra’s financial note, “the discount rate reflects the market determined, risk-adjusted discount rate that is adjusted for specific risks.” To simplify my point, the discount rate is applied to estimates of future cash flow projections to account for time-value, risks, and other factors. The bigger the percentage the lower the present value of future cash flows. In the period of one year, Telstra more than doubled its discount rate given its view on the changing market dynamics.
As part of Telstra’s half year results ending December 31, 2017, the remaining goodwill balance for Ooyala was written down by AUD $273 million to zero. Management issued the following comment on the write-down, “The digital media and Ad Tech market has continued to change rapidly and be challenging and this became the primary trigger for the write down.” As an aside, the total write-down exceeds the value of the original goodwill balance because of movements in currency exchange rates.
I believe there is a confusion on the nature of a write-down. Writing Ooyala’s goodwill to zero is not the same as saying Ooyala is worthless. Goodwill is created in an acquisition when the purchase price exceeds the identifiable assets of the acquired business. This is often the case with software business having relatively few tangible assets and a larger share of intangible assets (intellectual property, brand loyalty, etc …). To balance the accounting entries (against the payment), you create a goodwill asset. Writing down this goodwill asset is a referendum on revisiting the assumptions – based on current market conditions – used to support the original purchase price.
In other words, the write-downs were never a commentary on the business of Ooyala, but rather the valuation of Ooyala. Valuations are based in many respects on perceptions about the future and those perceptions change – often rapidly.
Telstra did mentioned the Ooyala buyout in its General Meeting address on Monday. “This [Ooyala exit] was completed via a management buy out with upside sharing arrangements for Telstra if the business achieves profitable growth and is sold in the future.” The listener could imply then that Ooyala is currently not experiencing profitable growth.
The journey of Ooyala is an example I’ve used in several presentations to illustrate a variety of topics. Most recent, at the Devoncroft Summit | Amsterdam, I referenced Telstra’s write-down of Ooyala to highlight the tremendous impact of insourcing on technology suppliers.
My final comment on the transaction is intended to add some context. Telstra is gigantic. 2018 fiscal year revenues was AUD $29 billion and EBITDA was AUD $10.1 billion. The investment results of Ooyala are not particularly material.
There are compelling arguments to attempt to diversify the cash flow of a Telco business into adjacent technology segments through targeted investments. Moreover, at the time of the original acquisition (late 2014) the Australian dollar was trading at almost parity with the USD dollar (1.07 AUD to 1.0 USD), which made it an opportune time to invest in USD denominated assets. The USD has since strengthened by over 30% against the Australian dollar.
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